Which is better? Cancer-causing cigarettes or artery-clogging junk food? Best to leave the health question for doctors to answer, but shareholders of Altria Group, formerly Philip Morris, need to ask a similar question about the two stocks they now own. That's because Altria (symbol MO) spun off its remaining stake in Kraft Foods (KFT) to its shareholders on March 30. For each share of Altria they owned, shareholders received 0.692 shares of Kraft, maker of Cheez Whiz, Oreo cookies and Oscar Mayer hot dogs, among other things. The deal makes Kraft an independent food company and leaves Altria primarily focused on tobacco products.
In this case, stick with smokes, says Charles Norton, manager of the Vice fund, which mainly invests in tobacco, alcohol, gaming and defense stocks. Vice fund could hold on to Kraft shares, but Norton says he doesn't like the company's growth prospects. Kraft is getting squeezed by high commodity prices and more competition from private-label goods sold by grocers, he says. And that will hurt Kraft's profit margins. "Altria has much, much more potential than Kraft," Norton says. Altria is his fund's biggest holding.
The removal of Kraft improves Altria's balance sheet. The spin-off reduced the company's debt because much of its pre-spin-off liabilities were amassed by Kraft's struggling operations. Since Altria has less debt than many of its competitors, the company could buy back as much as $40 billion worth of its shares, Norton says.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Moreover, Altria is in good legal shape. One of the biggest risks in investing in tobacco stocks is the threat of hefty court awards to smokers or their heirs. But Altria has won court battles in the U.S. over the past year that have reduced such risk, Norton says. His proof? Foreign tobacco companies usually shun the U.S. because they don't want to hassle with lawsuits, but U.K.-based Imperial Tobacco bought Commonwealth Brands, a Bowling Green, Ky., company, April 4 to enter the U.S. cigarette market. "It's a testament to how far the tobacco industry has come on the legal front," Norton says.
Wall Street's view of the newly liberated Kraft ranges from tepid to bearish. But at least one analyst, JP Morgan's Pablo Zuanic, advises against ditching your Kraft shares just yet. He notes that rivals H.J. Heinz (HNZ) and ConAgra Foods (CAG) were among the best-performing stocks of 2006, but says that Kraft has a stronger portfolio of brands and better international distribution. Zuanic thinks Kraft management is being too conservative in its earnings forecasts. He estimates that Kraft will earn $1.80 per share this year, which is at the high end of the earning guidance given by management. He also thinks that Kraft could double its share buyback program, to $10 billion, now that it is free from Altria. Zuanic rates the stock "overweight" and thinks shares will be worth $40 by June 2008.
Investors dumped Kraft shares on the first trading day after the spin-off. The stock fell 3%, to $30.85, on April 2. It closed at $31.58 on April 5, up 3% for the day and only pennies away from its pre-spin-off share price. Meanwhile, Altria has jumped 5% since the spin-off, closing April 5 at $70.44.
-
The Most Popular Apps for Retirement Planning in 2025A J.D. Power survey ranks retirement planning apps based on customer service and satisfaction. Does your financial app make the cut?
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
-
How the Stock Market Performed in the First 6 Months of Trump's Second TermSix months after President Donald Trump's inauguration, take a look at how the stock market has performed.
-
If You'd Put $1,000 Into Berkshire Hathaway Stock 20 Years Ago, Here's What You'd Have TodayBerkshire Hathaway is a long-time market beater, but the easy money in BRK.B has already been made.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
